The IPO as tool of pillaging execs

Commentary: TyCom, Flag Telecom played a role

SteveGelsi

NEW YORK (CBS.MW) -- The latest of the many allegations of corporate malfeasance against ex-Tyco executives surround a pair of initial public offerings from 2000: the TyCom and Flag Telecom deals.

Emerging details about the machinations involved in the two stock debuts mark the latest developments in a disturbing trend: IPOs getting more headlines in connection with illegal or ethically questionable activity than with the minting of new shares.

In the past couple of months, only a handful of IPOs have managed to make it out the door. Meanwhile, the financial pages have been filled with tales of IPO woes.

Deposed Merrill Lynch
MER, +0.57%
analyst Henry Blodget's damaged reputation hung in tatters after e-mail messages were made public showing him poking fun at recently public Web firms even as he endorsed them publicly, possibly to win investment-banking business for his bosses.

Similar e-mails are also surfacing from a CS First Boston
CSR, -25.00%
analyst who made disparaging remarks about companies even as his employer successfully brought them public during the frothiest days of tech and Internet IPOs. This development is on top of a $100 million fine and other penalties that CS First Boston faced for charging illegally high commissions for IPOs. See full story.

And in the midst of the WorldCom bankruptcy investigation, Congress is probing possible quid pro quo arrangements between Salomon Smith Barney
C, -1.12%
and WorldCom executives, including ex-CEO Bernie Ebbers, who appear to have been allocated shares of hot IPOs in exchange for banking business.

Now former Tyco
TYC, +74.50%
CEO Dennis Kozlowski and ex-CFO Mark Swartz are accused by New York prosecutors of tampering with Tyco's 2000 IPO for TyCom, as part of a sweeping pattern of alleged theft that netted them hundreds of millions. See full story.

Manhattan District Attorney Robert Morgenthau said the duo misbooked $95 million in expenses in connection with the initial public offering of TyCom.

The TyCom unit went public July 27, 2000, at $32 per share. The undersea fiber optic division of Tyco raised a whopping $2 billion in a deal whose lead underwriter was Goldman Sachs. It was the biggest in a flurry of some two dozen deals that week. After the telecom boom dried up, TyCom's stock tanked, and its parent brought it back into the fold in transaction consummated in late 2001.

Prosecutors have now alleged the TyCom maneuver was part of an overall pattern of hiding money taken from the company by listing loot as nonrecurring charges, which Wall Street typically overlooks when gauging profit performance.

Another $15 million was misbooked as part of a move by Tyco to buy 11 percent of Flag Telecom in June 2001. Flag went public in February 2000 at $24 per share and has since filed for bankruptcy.

It wasn't hard to hide this stuff, since Tyco typically lists a haystack of nonrecurring charges in its earnings releases -- not that unusual considering the complex accounting required by a sprawling conglomerate with 2,342 subsidiaries, 270,000 employees and $36 billion in revenue.

Maybe it shouldn't be a surprise that IPOs played a role in the alleged scams by Kozlowski and Swartz. After all, IPOs look to have been a tool deployed in many of the misdeeds in the financial-services arena now coming to light.

No wonder the IPO market is so moribund. If investors are gun-shy about buying into a brand-new stock these days, who can blame them?

In hindsight, the good old days -- that is, the days when IPO shares routinely doubled or tripled in their debut session -- weren't so good. Illegally high commissions were being paid. Investment banks hyped them to feed their business. And others may have used them to hide money they'd stolen.

Now, things are much more subdued, with individual investors staying away rather than risk getting ripped off again.

It'll take time for the wounds to heal, and maybe while those wounds are healing the people who pull the IPO market's strings can clean up their acts. Then, perhaps, the new-issues market can slowly be revived.

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